AFP's messy records, banking malpractices ‘perfect for crime’

By Lala Rimando, abs-cbnNEWS.com

Posted at Feb 18 2011 09:04 PM | Updated as of Feb 19 2011 07:50 PM

MANILA, Philippines – The disorganized financial records of the Armed Forces of the Philippines and bank officials who fail to follow acceptable practices are a breeding ground for financial crimes, fraud expert Heidi Mendoza noted on Friday.

At another inquiry on corruption in the military at the Senate, Mendoza, a former state auditor, noted that possible fraudulent practices were committed at the AFP since its financial records are a mess.

She also scored officials of local bank United Coconut Planters Bank (UCPB) for perpetuating the military financial malpractices when they failed to observe mandated procedures in banking transactions.

"Fake ang passbook, walang bank reconciliation, delayed accounting - This was a perfect menu for a crime," she told senators at the hearing.

Mendoza was tasked to follow the money trail of funds allegedly siphoned away by former military comptroller Carlos Garcia who was charged with plunder, which is non-bailable.

The hearing was held after the Office of the Ombudsman entered into a plea bargaining agreement with Garcia that allowed him to walk free last December.

On Friday, Mendoza described a labyrinth of bank transactions of the AFP with different UCPB branches. She was trying to show how the funds could have been mismanaged, even possibly lost, in that maze.

Disorganized records

Mendoza bewailed how AFP's financial records were not updated, making her and her audit team's work of going through the documentary trail a painstaking work.

She said that AFP has bank accounts in UCPB's various branches in Metro Manila and Visayas, but these were not reflected in the financial books of the military institution.

"There was no bank inquiry [by the AFP]... Only when we (her audit team) did a bank inquiry [did we know that there were UCPB accounts]... But these are not reflected in the books of AFP," she told the senators.

Some UCPB bank accounts in three Makati branches under the account name "AFP Inter-Agency Transfer Fund" are not in the official records of AFP itself.

"(These UCPB bank accounts were) as if personal funds," Mendoza stressed while explaining how unaccounted bank accounts could be a hotbed for wrongdoings.

The AFP maintains an official bank account at the Greenhills branch of state-run Land Bank in San Juan, Metro Manila.

It is in this Land Bank account, which is reflected on AFP's official records, that funds from various military fund sources -- pension fund, peacekeeping fund from the United Nations (UN), Balikatan Funds from the United States, and the AFP Modernization Funds -- are deposited.

Already, accounting for the transactions that involve each fund sources in this Land Bank account has been difficult, Mendoza said, as records that support some of the transactions were not immediately available.

Nonetheless, Mendoza's team discovered the UCPB bank accounts when they were tracing the whereabouts of about P200 million funds, which are part of the UN Peacekeeping Funds for Filipino troops sent abroad.

The P200 million turned out to have been transferred from Land Bank to 3 accounts in 2 UCPB branches in Makati City.

At the time, Mendoza's team were trying to help the Office of the Ombudsman, then under Simeon Marcelo, in building the plunder case against Garcia.

Garcia signed some of the bank documents in the creation of and succeeding transactions in these UCPB accounts.

(Read more on the P200 million 'smoking gun' on the military fund mess here.)

AFP's financial health

Mendoza also scored the AFP for delays in reconciling their internal financial records with those of its banks.

"When we were [checking if there was a] bank reconciliation in 2004, [we learned that even the] 2002 was not yet finished," Mendoza shared.

She stressed this to show that AFP's accounting group may have not been sure of the real state of the institution's financial health when they informed the government prosecutors under the Office of the Ombudsman led by Merceditas Gutierrez that all the UN Peacekeeping funds have been accounted for.

"I am stressing (that) such delay was too costly... We are talking of 2 to 6 years (of) delay in the conduct of bank reconciliation," she said.

Accountants regulary conduct bank reconciliation to determine if the payees of their issued checks have already encashed or deposited the them in a bank.

Mendoza also noted that the issuance of checks was not always the method used to move funds around.

She said that banks effected deposits and withdrawals through "debit and credit memoes."

While these "memoes" are not an unusual banking practice, these bank transactions could have been better monitored if AFP's accounting group regularly conduct bank reconcilations and update their bank records.

Banks' lapses

What surprised Mendoza and her team were how the banks effected these debit and credit memoes.

For example, some P22.8 million out of the AFP Modernization Funds were supposed to have been erroneously withdrawn from the "AFP Interagency Transfer Fund" account in UCPB branch in Alfaro, Makati City.

This amount was part of the Modernization Funds that Mendoza and her audit team were tracing. When they reportedly approached the UCPB-Alfaro branch, the bank officers only presented the "debit memo." They subsequently issued a "credit memo" to deposit back the P22.8 million.

To Mendoza's surprise, the bank officials allowed the withdrawal, which was 3 months before the bank was informed of the transaction, without any written instruction from the AFP or the government.

"(This withdrawal was) just based on a telephone instruction (from the AFP)," Mendoza shared.

"Do we realized the magnitude of the amounts involved here? These millions of pesos are moved just by (a) mere phone call," she said.

Tampered passbook

Mendoza also cited the case of a tampered passbook.

She noted that transaction entries in a passbook for the account of "AFP Interagency Transfer Fund" with UCPB-Alfaro in 2004 did not match.

In her powerpoint presentation, she showed that the bank account had a balance of P92.4 million as of May 19, 2004. The next entry, dated August 18, 2004, reflected a withdrawal amounting to P28.4 million.

The correct balance as of August 18 should have been P64 million, but the passbook showed a different account balance: only P28.4 million.

"The manager explained to me that there must have been a connivance [since there must have been someone in the bank who made the] command... to skip printing some transactions on the passbook," Mendoza shared.

These missing transactions on the passbook turned out to be payments to suppliers.

These supplier payments are themselves another set of complicated transactions, which involved the opening of another set of bank accounts -- by other AFP and the suppliers -- this time, with UCPB Salcedo branch, which is also in Makati.

These funds have something to do with the payment of medicines allegedly delivered to the UN peacekeeping forces.

As Mendoza's team further pored over these bank accounts and the suspicious movement of funds among and between bank accounts, the UCPB officials involved resigned.